Blockchain 102: Proof-of-Stake | Can We Agree to Disagree?
Last week, we broke down how the blockchain succeeds at getting a bunch of strangers to play custodian to global financial events without any centralized governance or an accounting diploma insight. We also touched on the two most popular systems for getting everyone on the same page — PoW and PoS — and how PoS makes participation more accessible to all without foisting expensive hardware or sending electric bills through the roof.
This week, we will be looking under the hood at the various PoS consensus available, how they work, and what they do differently.
Got Stake?
The core tenet of any proof-of-stake blockchain is ensuring that all participants have skin in the game. You can’t just show up empty-handed to this potluck. Even if it’s just a cupcake. By having participants put something down in order to have a seat at the table, PoS blockchain not only uses its distributed wealth to protect the network from attacks but also has better mechanisms for handling inflation cheaply.
However, it’s not unheard of to have one potluck have you bring only ingredients for their designated cooks to prepare the meal, while another may want you to cook the meal onsite. Different houses, different rules.
So, Let’s Start Cooking
Released in 2012, Peercoin was the first blockchain to implement PoS as an answer to creating a decentralized ledger system that was energy efficient. Validators are randomly chosen to create blocks after their coin has matured — maturity means holding the coin in the blockchain’s native wallet for 30 days, which is also known as coinage. After creating a block, the system sends the creator’s coin back to the owner’s wallet, thereby resetting the age of the coin to zero. The owner now has to wait another 30 days for the coin to mature before they can participate in the next block generation event on the network. Using coinage to validate blocks is one of the biggest criticisms leveled against this system due to the waiting and the fact that those with small balances rarely get to participate.
Lease Proof-of-Stake (lPoS)
Designed to improve PoS and address the cold shoulder small stakers often get, lPoS allow users with small balances to lease their assets out to bigger nodes in order to improve their chances of being chosen to validate blocks. Basically, think about it as the blockchain’s version of Voltron — making a bigger whole from smaller parts. The reward received from creating blocks by the staking node is proportionally shared among the leasers. Leasers also have full control over their assets and can break the lease whenever they wish.
Delegated Proof-of-Stake
This is the closest the blockchain has gotten to modeling a decentralized democratic system with none of the campaign pomp or emotional bias. This system contains a fixed number of validators on the network who have to be voted by the network. However, rather than having a rowdy system where voters, across different landscapes and timezones, may possess an undue advantage, the community is represented by elected entities known as delegates.
Candidates vie to be nominated as a delegate through community votes. Using their token, the community votes for delegates and the candidates with the most votes wins. Once appointed, users can send their tokens to delegates who will stake for them on their behalf. Block rewards earned by the delegate are shared proportionally amongst stakers. However, delegates may also get to charge service fees ranging from 1–20% of the block reward. If a delegate misbehaves, the community can vote them out and vote in another candidate just as quickly.
dPoS is the most widely adopted and fastest-growing PoS consensus algorithm due to its fast transaction ability, scalability, cheap transaction fees, and novel democratic system that encourages honesty and efficiency from delegates. Ongoing research and development on this protocol have resulted in variants addressing custodianship and liveliness.
These are:
- Liquid Proof-of-Stake and
- Bonded Proof-of-Stake
Liquid Proof-of-Stake: Liquid Proof-of-Stake makes delegation optional, allowing users to transfer their right to vote to another user without having to send their tokens along. It also gives users the right to vote in changes to the protocol (not just who delegates) and will penalize validators trying to exploit the network.
Bonded Proof-of-Stake: bPoS spots the same features as Liquid Proof-of-stake with one caveat; the network will penalize the validator and the stake delegated to them for jeopardizing the network’s safety and/or liveliness.
Hybrid Proof-of-Stake
A chimeric beast built for security, HPoS is an implementation of Proof-of-Work and Proof-of-Stake system meant to deter attackers by sheer cost implication. Having to own 51% of the nodes and 51% of the total supply just to attack yourself is a feat worthy of making Rube Goldberg proud. However, this system inherits the flaws of both systems when it comes to hardware costs as the network matures and embracing small stakers.
Conclusion
The democratization of blockchain through dPoS (and its variants) is ushering a free and fair ecosystem where anybody can participate in a peerless and distributed consensus system where their participation not only counts but is also rewarded. This is one of the reasons why at Concordium we have decided to deploy a Delegated Proof-of-Stake Consensus to both use the features of this consensus but also because we are certain that this model fits the best the current and future enterprise needs when it comes to new and agile technologies.
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